The AFC Uzbekistan Fund Class F shares returned +1.6% in May 2023 with a NAV of USD 1,804.41, bringing the return since inception (29th March 2019) to +80.4%, while the return for the year stands at +3.9%. On an annualised basis, the fund has returned +15.2% p.a. with a Sharpe ratio of 0.98.
May saw the final announcement for the long-delayed rights offering of Uzbekistan’s largest steel company, Uzmetkombinat (TSE:UZMK), as well as continued broad buying in the stock market, resulting in positive performance this month.
AFC Uzbekistan Fund Valuations as of 31st May 2023:
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
Uzmetkombinat Advances Rights Offering
While historical precedent in Uzbekistan’s capital markets has been for state-owned enterprises (“SOEs”) to increase equity capital by selling all new shares to the government at par value, thereby drastically diluting minority investors, since Uzbekistan “re-opened to the world” back in 2018, this has become a figure largely relegated to the past.
In recent years, SOEs in financial services, consumer goods, and the industrial sectors have been providing pre-emptive rights for minority investors, which is a very basic, but nonetheless positive development in Uzbekistan’s capital markets development as it reinforces the government’s focus on improving minority shareholder rights.
For UZMK, on 16th March 2023, the company’s supervisory board announced plans to issue additional ordinary and preferred shares in order to strengthen the company’s balance sheet in anticipation of a subsequent public offering to facilitate the financing of the capacity expansion underway which will increase annual steel output from 1 million to 2.5 million tons.
The announcement of the rights issue was registered with the Ministry of Economy and Finance on 5th May 2023 and permits all shareholders in the share registry as of 16th March 2023 to subscribe at the closing price on 3rd March 2023, which was UZS 8,959.
UZMK is 88% owned by the government through the Uzbek sovereign wealth fund, the Uzbekistan Fund for Reconstruction and Development (UFRD). The UFRD will subscribe for the equivalent of EUR 140 million worth of shares.
Now, while this is big news in the markets the past month, we will not subscribe due to one of the many ironies in frontier market investing. The rights issue has been planned for several months, according to a discussion at the 2021 annual general meeting of the company, and since then, retail investors - some of whom bought shares more than 50% above the rights issue subscription price - have been frantically selling. This has enabled the AFC Uzbekistan Fund to scoop up hundreds of thousands of dollars of cheap shares at up to a 6% discount to the offering price. Retail investors did not understand they would have pre-emptive rights to maintain their position in the company and were fearful of dilution, and we became very willing buyers during the panic selling that ensued. While the majority of this firesale has concluded, we can still pick up cheaper shares and therefore decided it would be more attractive to purchase shares on the open market than subscribe to the offering.
Nonetheless, we look forward to seeing the rights offering being successfully closed in June and the company continuing to advance toward bringing its new production capacity online over the next two years, which will not only lead to increasing revenues, but also to the return of the company’s historical dividend payouts, which has traditionally meant a mid-teens dividend yield.
At the end of May 2023, the fund was invested in 26 names and held 10.2% cash. The portfolio was allocated to Uzbekistan (89.7%) and Kyrgyzstan (0.1%). The sectors with the largest allocation of assets were materials (41.5%) and financials (33.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 4.65x, the estimated weighted harmonic average P/B ratio was 0.96x, and the estimated weighted average portfolio dividend yield was 4.03%.